EUA auction cancelled because of low volume of bids for the first time since 2016

This analysis has originally been published in an extended version for ICIS EU carbon subscribers on 16 May 2018  at 12:53 CET.

On  16 May, the Intercontinental Exchange (ICE) cancelled its daily EU Allowance (EUA) auction as the result of the total volume of bids falling short of the volume of the allowances being auctioned.

Main points

• ICE announcement (link)
  • The volume will be distributed over the next 4 UK auctions
  • ICE to update auction calendar “will be revised and published in due course”
• There was 4.6m EUAs planned for 16 May auction for the UK platform
  • the volume of bids submitted was 4.1m or short by 467k (see the market report here)
• This is the third auction to be cancelled in 2018, although the first one on ICE this year – EUA auctions cancelled previously in 2018 took place on the European Energy Exchange (EEX)
• The auction regulation (link) sets out under Art 7.5: “Where the total volume of bids sorted pursuant to paragraph 2 falls short of the volume of auctioned allowances, the auction platform shall cancel the auction”

Analysis

• Please note that the reason for the cancellation is different than the other cancellation seen in the past months on EEX
• Indeed in the last 3 EEX auctions, the reason for the cancellation was that the clearing price was “significantly” under the secondary market price
  • 29 March 2018: Common EU platform auction, EEX, 4.2m
  • 3 November 2018: German EUA auction, EEX, 4.5m
  • 7 September 2017: Common EU platform auction, EEX, 4.3m
• The last time an auction cancellation materialized for low volume of bids reasons was in 2016 on ICE – back then this was the first time in Phase III (2013–2020) for an auction to be cancelled due to lack of bidding volume
  • 14 December 2016: UK auction, ICE, 3.5m (see ICE auction calendar 2016)
• This means that the auction volume of 16 May is shifted in equal amounts to the next four UK auctions with the following updated volumes:
  • 30 May 2018: 5.7m EUAs
  • 13 June 2018: 5.7m EUAs
  • 27 June 2018: 5.7m EUAs
  • 11 July 2018: 5.7 EUAs
• Market implications
  • Cover ratio
    • From Jan 2017 to May 2018, the ICE cover ratio was historically lower on average (2.1) than on EEX (2.6)
    • However, despite the heavy use of the cover ratio in describing auction by market observers, it is hard to read anything valuable from such indicator
    • Indeed, one bidding entity can make several bids at unrealistic prices way under the secondary market price propping up artificially the cover ratio
  • Demand
    • In that context, one can assume that the regular demand from power utilities for hedging was low (with limited carry trade action from financials) and therefore the auction was cancelled
    • This means that some players did not get their needed volumes and were forced to go on the secondary market to get it
  • Secondary market price
    • Late evening on 15 May, the European Commission published the 2017 total number of allowances in circulation (TNAC), which was in line with market expectations
    • In that context, the price of the benchmark EUA contract in the morning of May 16 appeared steady above €14.3/tCO2e and started dropping slightly around 10:15CEST
    • However, at 11:00CEST, at the auction time, the price jumped back after the announcement of auction cancellation
    • The contract settled at €15.18/tCO2e, trading up by €0.86/tCO2e – it was the highest settlement price since 20 June 2011.

Yann Andreassen is Senior Analyst – EU Carbon & Power Markets at ICIS. He can be reached at Yann.Andreassen@icis.com